By Marilyn Gettinger | Thomasnet Procurement Journal
The ability to offshore, nearshore, onshore, or insource (producing at the organization’s own location) is a critical business capability that can reap significant revenue and profit growth — or significant headaches.
Organizations today and in the future must be able to purchase, ship, store, and manufacture goods at and from various locations throughout the world based on the lowest ultimate cost at any particular time. If an organization is moving product from its own manufacturing facility to a growing market, it may be more cost-effective to produce and ship within that market. Also, if a company has significant sales in a particular country or countries, purchasing from or manufacturing in the area is a good business and public relations decision.
In order to make the correct global sourcing decision, the organization must be able to capture all of the costs involved. Many organizations rapidly moved their production offshore to capture the low wages of foreign factories only to find that logistics and importing costs more than offset the wage savings.
Supply professionals have a great opportunity to show their contribution to their organizations’ bottom line by asking the right questions before their organizations go global, move production from one offshore location to another emerging country, or evaluate its current strategy. Making sure these questions are considered and then answered ensures that the organization’s “shoring” move will be smooth and most advantageous.
Making a list and checking it twice include the following:
- Is the cost of goods being used as the baseline for comparison an accurate number?
- What is included in the cost of goods?
- Are all direct labor, direct materials, overhead, and general and administrative charges captured?
- How will the organization handle overhead charges when the product is no longer produced in the organization’s manufacturing site? Will it increase overhead charges to existing products?
- How will the organization gain information on potential suppliers offshore or nearshore?
- How will the organization perform the supplier selection process in an offshore or nearshore situation? What will this pre-transaction activity cost?
- What does the organization know about the business culture of the country?
- What impact will the business culture of that country have on the cost of producing the product?
- How involved will the government of that country be in the buying or producing organization’s business? How will national and local government requirements add to the cost of the product?
- Will the foreign government expect the buying organization to use local suppliers for materials or other countertrade demands?
- Will there be employable people in the area to perform the necessary work? What training will be necessary and the cost?
- Will the buying organization need to make changes to the product or product specifications to accommodate the offshore or nearshore manufacturer?
- Will there be significant investment in developing a relationship prior to beginning the business discussion? If so, what will this add to pre-transaction landed costs?
- How much time and effort will be necessary in maintaining the business relationship once established?
- Will the buying organization need to provide tooling, molds, machinery, etc? If so, the buying organization will need to declare this to customs as an Assist and include this in its total landed cost estimate.
- What is the logistics infrastructure of the country? How much pipeline or transportation inventory will the buying organization need to hold to support delays due to infrastructure challenges?
- What is the lead time from the time an order is placed until the goods arrive at the buyer’s backdoor? How much inventory safety stock will be needed to support this cycle?
- What law will govern the bill of sale?
- What are the working conditions of the offshore or nearshore facility? What changes will the buying organization need to request to support social responsibility factors such as the environment, human rights, safety, and community?
- Will the buying organization need to employ someone to oversee the quality of product and the meeting of required standards?
- How will the buying organization manage the move to an overseas market without running out of inventory?
- Who will oversee the offshore or near shore start-up and day-to-day management?
- What marketplace factors will trigger the decision to move to a more cost-effective location?
- Did the organization check that the material, product, or component
- Is allowed into the country of importation
- Is allowed to be exported
- Is allowed but must be registered with one or more government agencies
- Is a product under a quota
- Requires special marking and labeling
- Requires country of origin marking and documentation
- What International Commercial Term (Incoterm) has the buying organization selected? Is the supplier clear on the exact interpretation of that Incoterm? What logistics costs will the buyer incur?
- What are all of the pre-lading requirements for a container prior to being loaded onto a ship coming into the United States or into an offshore location?
- What documents will be required and when and how will they be made available?
- What certifications will be necessary such as The Lacey Act (wood in the product must not be from endangered rain forests)?
- What is the best port of entry that will minimize logistics costs?
- What is the Harmonized Tariff Schedule for this material, product, or component? What are the duties on the product?
- Does the organization have the logistics expertise to manage international shipments or does it need to source and select a freight forwarder?
- Does the freight forwarder employ customs brokers or does the buying organization need to source and select a customs broker?
- Does the buying organization have an all-inclusive total landed cost model to determine the true cost to manufacture, purchase, and move a material, product, or component from an offshore or near shore location?
- Finally, has the organization compared the offshore, near shore, or onshore total landed costs to each other and to the original cost of producing the product in its own factory?
Going global, selecting the best shore, and managing the ongoing process is important to the organization’s bottom line. If an organization quotes delivery to its customers without a real understanding of costs and effort, it may find that the pre-transaction, transaction, and post-transaction costs of doing business globally have eliminated their profit margin and may also force the organization into losing money.
Again, supply managers need to understand the global sourcing process, its costs, and its challenges. Organizations need help in understanding the positive and negative impact of global sourcing. Supply professionals should grab the opportunity.